Credit squeeze: The problem with down payments

News item, and then an e-mail from a reader. First the item, from Reuters: "As U.S. banks mop up the mess from billions of dollars of bad home loans, buyers are finding the days of cheap money are over and, in many cases, tougher versions of old lending rules now apply. ... Gone are the days when almost anyone could get a loan with a down payment of less than the traditional 20 percent."

Now the e-mail, from reader LTL: "Today I went online to try and see what I would qualify for if I tried to get an FHA loan. A bit about me, I'm 29, married, with two young children. I'm a lawyer, with household income of $225k/year. We recently relocated back to LA.

"Knowing that the new Freddie/Fannie limits had gone up, Today I went to the FHA website to see what I could qualify for. I saw that the L.A. County mortgage limit had increased to $729,750, which coupled with a 3% down payment, yields a maximum purchase price around $750,000. Or so I thought. Upon running my numbers (225k annual salary, $500/month car payment, $900/month education loan payment), I only qualified for a FHA loan of $362,790 with a 3% down payment of $10,973. It calculated a total monthly housing payment (PITI) of $3661, leaving me over 10k in left over income. 

"The same calculator also yielded what I would qualify for with a "conventional" loan. I apparently qualify for a " conventional" loan of $672,378 with a down payment of $118,655, for a total maximum purchase price of $791,033. My monthly housing costs would be $7,472, leaving $7,541 in remaining income. So that's almost 50% of my income (and I haven't figured out how the calculator figures my take home income) for housing.

"I don't think most people have my annual income, I feel very lucky to make what I do, and I know that census statistics back up my contention that the percentage of people who make more than me is very small. So obviously, the FHA loan program is of little use to buyers in L.A. If I can't qualify for the maximum amount, who can?  And if I went with the conventional loan, I would need over 120k in the bank for a down payment. How many people have that sitting around? Not many. Most buyers over the last few years have put nothing down, let alone 6 figures.

"I would especially be interested to hear what the real estate agents and Cal have to say about what they are seeing when people attempt to qualify."

Thanks, LTL. Before I ask for comments, an observation: I know many here believe the market should return to the days when a sizable down payment was required to purchase a home. If that comes to pass, the California market will remain weak for quite a while. If you take low-down-payment buyers out of this market, you shrink the pool of buyers sharply.

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com

Comments

[digitaljmh]

The problem is most people don't look deep enough into the lending market. There are still 80/10/10's available for up to the new conforming limit for LA county. If you have good credit, high income, and cash in the bank, you can do anything.

There's no excuse for the e-mailer to not be socking away at least 5k a month in savings, especially if he is still a renter. If he can't save 120K on his income, that's his problem. It should only take 2-3 years at that level, if you are truly committed.

The days of free money are gone, get over it already. That doesn't mean that people are going to stop buying houses, it just means the conservative people who save will be the ones with the upper hand for the next round. It's a cycle, give it time and the money will get loose, just not the same as before.

[Laker]

We need to understand the reasons behind home mortgage being 6%. This is only because by definition, the risk is very small. VERY SMALL. The collateral would in 99% be worth more than the loan amount, so the lender could recover the debt.
HOWEVER, if there is relatively high chance that collateral will not cover the debt, interest rates can't be 6%. The risk is simply way to high and is much closer to credit card interest rate than to mortgage rates. I think that zero or very low down payment should be available for some that need/want it. But it should carry 15-20% interest rate. If you want a loan with 6%, you better prove that there is no chance for default, (or at least very minimal risk to the bank)
Low risk = 6% rate
High risk = 16% rate.

[skevh]

"and we in SoCal are known to live well beyond our means."

that's because you have to live beyond your means just to live like an average person anywhere else in the country.

bring on the bust.

[someday the ants will eat grasshoppers]

Like others have said, LTL, you're way off on your calculator. You're easily going to check in under $5K per month unless your credit is terrible.

But let me ask you: if you had over several years saved the six figures, would you be as eager to risk it in the LA market? It's easy to get excited about real estate when your risking the bank's money and not your own.

I have enough cash and income to buy the house I want (in the $1M+ range), and I'm still not buying. Every day I rent, I'm saving about $500 off the eventual purchase price--possibly more. At $150K saved per year, that's not a bad "wage" for being a professional renter.

Those of us on this blog in the market for a $500K home are still "making" $75K a year by waiting it out in a rental. Kudos to all the renters and their discipline.

LTL, $225K per year is nice, but be patient, don't blow it. Raising two kids is expensive, and you'll be glad you saved in your 20s and early 30s. It makes a huge difference later.

Stay out of the market until you have the 20%. Better to be the ant, given what's coming down the road.

[Nick]

I would love to see the market require a 20% down payment again. I'd also love the government to not put my money up to guarantee loans with 3% down, ever, especially on properties which are with more than 3x someone's annual, sustained income.

Prices are way out of proportion to income, and they are adjusting as they should in a free market. The only reason people can still buy houses they can't afford is corrupt and/or idiotic politicians not serving the peoples' interests, and lenders "banking" on a bailout.

I have no problem with independent banks making more risky loans than 20% down and 3x sustained, documented income, but they alone should bear the losses when people default on them. I'm personally disgusted whenever I read/hear about someone implicitly thinking of their home as an unlimited ATM for withdraws, especially when it's ultimately my taxpayer dollars they are living beyond their means with. It has to stop, and if housing finally gets affordable again in the process, it would be a win/win.

[Nelcisco]

I been Beating this drum for the last 4 years.

I was born and raised in the Los Angeles area all my life, a have son born in Burbank where my wife and inlaws are all born and raised. I decided to leave the L.A. area in April '02. Moved to the Seattle/ Tacoma area for obvious reasons that Burbank was getting pricey at the time.Went to visit that Christmas and saw those same homes jump about 20% from Apr. of that same year, the whole family said "come back home we miss you", my wife I said no way, we're priced out.

I got into the mortgage industry in '04 up in Tacoma Wa during the boom, my brother in LA was excited I was a loan officer, as an LO I priced out loans and put files together. What I found was that most people were crazy to do a stated loan and irresponsible for lenders to underwrite them. I'd ask my brother how people in LA were doing it, not knowing about loans or how they worked he said he had LO friends that were making 8k to 15k per loan and I should come back home & take advantage of this "gold" rush. I said the bubble has to break sooner or later, NO WAY he said, everyone makes $ in L.A., I thought to myself not everyone has a TV series and make 250k a week and when the bubble bursts It'll be a catastrophy and here we are now.

I came back in February of last year right at the time of the subpime meltdown to do loans in LA and its been extremely difficult to make a deal work, its been a nightmare.I live in the central coast now and I'm happy Im here, forget LA, Kobe Bryant doesn't mean that much to me

[Cal]

From the tealead CNBC link: "
"Taken individually, these risk factors may not have significantly raised the likelihood that a homeowner would fall behind on payments; taken together, however, these risks materially increased this likelihood," Kroszner said."

Risk layering. If you have a high LTV ratio, as equity is the main protection the lender has against loss, then everything else better be rock solid. Appraisal. Borrower credit history (not just FICO), lower front end and back end DTI, documented income. Something has to give, it can't be something for nothing.

This is what you are seeing with stated income now, they allow it but everything else has to be solid. Especially the down payment.

So a perfect borrower with a great job history, proven use of credit, has reserves, the housing payment is reasonable (even conservative) relative to income, in a stable market. Should be able to get low down payment loans. But once other parts start to slip something else has to be tightened to make up for it. And I think only down market conditions should be a factor otherwise you can create a reinforcing cycle that would allow yourself to loosen underwriting too much. Once the market is stable or better market conditions shouldn't be considered.

[Tanta]

That calculator you used does not ask you for the location of the property.

You will note that it tells you its maximum loan amount is based on "national averages."

What this means is that you got "cut off" at the national average loan amount, long before you stopped qualifying based on income.

This tells you nothing, unfortunately, about how a buyer in LA would be qualified for an FHA loan.

No calculator in existence will give you a geography-based answer unless it provides some place for you to enter your geography.

[gary]

only the arrogance of thinking LA or OC is the only place to live is why he has problems. Along the 15 south of the 78 thru to SD have many great homes. But, i would watch out for any half way done new homes. There is no infrastructure and there will be no infrastructure regardless of what the builders say.

[oc not 4 me]

hey laker.................................have read you many times and you actually make more sense than most. unfortunately many people still live in fantasy land. such as the re salesperson in the reuters story. he will go into foreclosure long before he can sell. i know (occupation kept secret) too many of the r/e salespeople and loan types and they are all crying the blues and still driving the MBs and beemers and still trying to show the all powerful "illusion of wealth" syndrome. I actually like them but I personnally now drive a used honda and actually have some money in the bank.

[Long time listener . . .]

Thought I'd jump in, apparently the Ginnie Mae calculator was way off.

Also, just to clarify, I'm a huge bear on this housing market. My only reason for the email was to point out that I think that the new FHA loan limits will not impact this market at all. Many people seem to think that these new loan limits are a savior, but they are not.

As far as conventional loans, my point was that if you have to pay 50% of your income to get a very average home in a very average neighborhood, its unaffordable. And people will not qualify for loans at those DTI ratios.

PS - thanks for the commentary on my apparent lack of savings. Very encouraging that so many of you are worried about me not saving enough money. I appreciate your concern. But note, I never stated how much I have to put down, just pointed out what it would take, and how out of reach that is for the normal buyer in LA. That was the point. Now I'll go look at the apparently much better calculators out there.

[perks]

Tanta: You actually CAN enter your geographical information by running the calculator, and then clicking on the "Detailed Estimate" to select your state/county and some other details to get a revised figure.

Unfortunately, it still caps you at a loan amount of $362,790 no matter other numbers what you enter.

Is it any surprise that a government-run website is utterly useless?

[Susan]

Peter, I think you missed the story about the FHA program with nothing down. Not all the loopholes have been plugged up.

No down payment? No problem!
http://www.msnbc.msn.com/id/24580917

[Steve]

"With prices collapsing, the incentive not to buy a home is increasing by the week, and with inventory showing no sign of improvement, prices will keep falling," predicted Ian Shepherdson, chief U.S. economist at High Frequency Economics.

[Jeff S]

Just guessing, but I think y'all are misunderstanding the housing cost number. It appears to me that it includes an estimate of property taxes and perhaps mortgate insurance or the like.

Lots of people like to ignore those housing cost numbers but they are definitely part of the price of ownership.

[Laker]

Thanks oc not 4 me. I just post what i see and i don't make money in RE (no investment properties) so I have no agenda.
Just yesterday, I found that one of the houses i was following on my blog got "sold".
"sold" as in fraudulently sold to a straw buyer. I'm amazed and shocked that today with all the mess, so stupid bank was found to fund a $700,000 loan for a house worth maybe $500,000 or less. This house was sold at peak for $750,000 and a flipper bought it for $500,000. Then he slapped a coat of paint and cut the weeds and listed it for $725,000...The house was sold withing 2 days and no sign was even posted... I will post details on my mini-blog soon. Fraud in the middle of day light when banks are seeking a bailout...GOD!

[TakeFive]

LTL - you're focused on getting a loan and not a property; as in "I can't do B unless I first do A"

You're a lawer making damn near a quater mil under age 30! You have some skills, right?

Find a white collar criminal with a nice home and offer to fix his problems for a quit claim to his house. In my old neighborhood, one of the nicest homes was owned by a bail bondsman. Want to guess how he got it?

[Cal]

The NAR press release has been very lending based lately. Calling things restrictive and talking about declining market polcies. Like a Realtor knows underwriting.

What is happening is they are lobbying Congress, they will get the FHA and GSEs to loosen up. Political underwriting, we all pay. Realtors don't care how much it costs others, they only care how much it costs them.

[Westside Renter]

I'm a long time reader and occasional poster on this blog. Like many here, I have a good income and a large amount of money saved for a down payment, but I'm sitting on the sidelines waiting for prices to return to some type of normalcy. I'm just curious what the general consensus here is for the bottom in prices on westside houses.

For example, I'm looking at 3 bedroom, 2 bath houses, all well under 2000 square feet, in Westwood, Cheviot Hills and Rancho Park. The average price seems to be $1.1M +/- $200K depending on the location and the condition of the house. I think those prices are ludicrous.

What does everything think is the "right" price for just an average 3/2 house (I'm not talking remodeled with the Viking stove, just normal) in those areas?

Is $700K for an average 3/2 house in those neighborhoods just a pipe dream? Or will they actually fall that much?

Cal, many of us here respect your opinion. What do you think?

[ss]

All this talk about the guy making 225k a year and not having $100k in the bank in 2-3 years ignores the obvious: he loses half of that to taxes. At 225k he is going to get hit with the AMT on top of it all. And to the guy who can't find anything for less than 900k, look in suburbia. Not being realistic. You commute, but the lifestyle is superior to the city, and far safer.
I just don't see a problem with 10% down. I have done 5% down in the past, and done just fine. You rent until you can afford the payment, that's all, or adjust your priorities and buy a smaller, older home, and put in some sweat equity.

[Rich]

Susan's comment would be a good place to jump in and talk a little about FHA and VA. These government agencies do not lend money, they insure loans made by private entities. In order to qualify for government-backed FHA and VA insurance the lender has to meet some stringent standards, including higher-than average credit ratings and an independent appraisal by an FHA-hired appraiser. The value of
FHA/VA insurance is that the loan becomes top-shelf salable in the securitization market. To the extent that the securitization market is still functioning, these loans are probably being bought up without problems.

The issue here seems to be that FHA is under pressure to increase its risk in order to serve as a foot-soldier in the war to fix the broken market. A loan for a home whose price is so far above median income as LTL's increases the risk of default because problems such as temporary unemployment are more likely to cause default (income from temporary employment won't cover expenses as it often would for subprime buyers, and the house is harder to sell to discharge the loan).

LTL was very lucky that FHA's low-down-payment options were available for the jumbo he was looking for, but if he still couldn't stretch there with a 3% down payment that's a good sign that he should set his sights lower. The readers of this blog know by now that his house is going to be a $500,000 house by Fall, so FHA saved his bacon.

I don't agree with the readers who think low-down payment loans and market securitization are universally bad; they are absolutely vital to a healthy housing market. You won't have a housing recovery without them; it does no good to have your desired house fall to the price you want and then find out first-time buyers can't buy your existing home because nobody can afford a loan at 20% down...

[Laker]

Rich, you have two major mistakes:
1) You said :"...FHA requires... including higher-than average credit ratings.." BS. FHA could be donw with FICO of 580-620 as long as it is FULL DOC and DTI rations are met. I don't think 580 FICO is higher than average, it is more like a sign that the borrower is a bad credit risk.
2) You claim that 20% down requirement is bad because: "...first-time buyers can't buy your existing home because nobody can afford a loan at 20% down..."
Well, when people start to save instead of spend beyond their means, they will have 20% down and therefore could afford the loan with 20% and the house too.
Until then, they have the available and relatively affordable option to rent.

[Inland empire]

LTL I understand your reply and I'm not trying to judge your fiscal status. My question is your nice area ought not be what sways your home buying decision. School and transportation are the things I find the most important. My job was at the junction of the 710 and Washington Blvd and I drove to San Bernardino. I wanted a home my income required going away from the city to afford one so we move to Ontario. It was nice, quiet, great school and 25k (1966)for a new home. The thing that was not worth it was the drive as the population grew the drive got longer. So if you can find a home you like with good school close to your job that is more important as long as you can afford the payments. But I must say with your income I don't understand your problem. Maybe you want a little more home than you really need. You've got the time to build wealth one day you will have it..

[Milla]

Laker: having difficulty saving 20% down does not necessarily mean that one lives beyond his means. people seem to be forgetting that while house prices are falling, the cost of everything else is rising, including rents. think of student loans for four years of college, plus the cost of an advanced degree, which helps up one's earning power. food costs, gas, heathcare -- all up. oftentimes the money that's supposed to be stashed away ends up going to meet basic living expenses.

[Long time listener . . .]

Once again, the point of my email to Pete was to refute the arguments made by many on here (I'm looking in your direction Puckhead) that when prices come down to what seem reasonable, 500k?, they will be snatched up. The payments on a 360k mortgage is still a $3500/month payment in total costs. Not a whole lot of households will be able to swing more than that without significant income, most likely above 150k with very little other debt. So even if houses get to 500k, there won't be that many people who can qualify, and if they are first time home buyers, maybe than can get FHA help, maybe not. And if they already own, they have to get out of their own house to move up, and that will prove very tough. There was a reason houses cost what they did in 1999 and 2000, because that's what income levels could support.